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A friend of mine recently asked me about how I setup my contract programming company. This is what I sent him, to help him get started.
Here’s how I handle being a contract programmer, generally working through agencies. This assumes you’re just going to use your company to maximize your income for yourself, and don’t plan on hiring anyone else – although you may “hire” your spouse to do some work and get the same benefits you’ll get.
As usual with this kind of thing, here’s my disclaimer that I’m not a lawyer, accountant, tax advisor, etc.
I set up an LLC with the Secretary of State. You can pay a service, lawyer, or accountant to do all the paperwork for you, but it’s pretty easy to fill out on your own.
When you setup your LLC, you need to use an address. Some people use a PO box for privacy. To me, our addresses are already easily available on the internet, so a PO box is a waste of money.
You’ll also need a “registered agent”. This is someone always available during business hours – potentially to receive legal documents. I used https://www.texasregisteredagents.com/, for $50 a year.
You’ll also need to apply for an EIN from the IRS. Go here: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
I also elected for my LLC to be treated as an S-corp. This is different from starting an S-corp. An LLC with an S-Corp election seems to be the best fit if you plan to take some of your personal income as W2 salary, and some as dividend income, which is taxed less than salary (more on this later).
To be treated as an S-Corp, you’ll need to file form 2553 with the IRS https://www.irs.gov/forms-pubs/about-form-2553
When you start working through an agency, you’ll probably need to give them a W9 form https://www.irs.gov/pub/irs-pdf/fw9.pdf.
Setup a company website
A website isn’t required since no one will probably find you through a Google search.
However, it is nice to have an email address that matches your company name, and it doesn’t hurt to have a simple “brochureware” website.
How Much to Charge
Nowadays, for projects where you’re basically a temp worker, it looks like your hourly rate will be about 15-25% higher than it would be as an employee. This isn’t exactly the best, since you may have enough downtime between projects that you end up making less (in total) than you would at a salaried position. However, this seems to be what the market is currently bearing.
So, try to look for longer term projects. A one-year project at a slightly lower rate may be better than a three-month project at a higher rate.
But keep in mind that part of being a contractor is being easy to let go. I had a project at a huge corporation on a one-year contract, with an expected second year, when Covid hit, and all contractors were let go.
The best defense is to live with manageable expenses, save a lot, and charge as much as you can when you are working.
To get higher rates, you’re probably going to need to have specialized skills, which may mean longer downtime when searching for a client who wants those skills.
Or, if you have the sales ability combined with the technical ability, you can do value-based projects. The standard rate seems to be to charge ten percent of whatever value (profit increase or expense decrease) your work will bring to the company.
Most places I’ve worked for ship me a laptop to work on. It has their standard software and security. If you’re going to do work for someone else on your computer, I suggest getting VM software and a beefy computer with lots of RAM. I want to keep my stuff separated from theirs.
For this type of business, you’re probably going to have less than 50 payments in a year and maybe 10 payments per month. Personally, at the end of the year, I export my business bank and credit card statements as a spreadsheet and use that information to file my taxes.
I used to use QuickBooks, until Intuit royally screwed up my payroll and literally had the worst “service” I’ve ever encountered in my life. After that, I cancelled all my Intuit services (including using TurboTax). Remember that this is the company that has been lobbying Congress to make it difficult for the US to have a free online tax filing system through the government. They are slimy and no one should use Intuit for anything.
Now that my rant is over, there are two things you’ll need to decide about how your company handles money: your fiscal calendar year and whether you account for money on a cash basis or accrual basis.
I keep things simple. My company’s fiscal year is the calendar year and I operate on a “cash basis”. Cash basis means I only count the money as “earned” when I receive it. Accrual basis is when you count the money as earned when you send out your invoice.
Business Bank/Credit Card
You’ll need a separate bank account and credit card(s) for your business. You don’t ever want to pay for personal expenses with this bank account or card (although, an occasional mistake of accidentally paying for lunch with the company card, and later personally reimbursing the company, won’t be the end of the world).
The basic idea is that the company needs to act like a real company, a separate entity, only managing its own income and expenses. When the company pays you (as a human person), you can do whatever you want with your money. But, when the money is in the company account, treat it like the company’s money. Otherwise, you may end up “piercing the corporate veil” and lose the liability protection you may have with your LLC.
For banking, I use American Express Business Checking. It’s no-fee and pays 1.3% interest (most business checking accounts I’ve seen don’t pay any interest).
I use American Express Blue Business Cash as my main business credit card. It does not have an annual fee, and it does have some cashback benefits. If you plan on buying a lot of things on your business card (new computer, desk, etc.), it might be worth looking for a business card that has a big signup bonus.
Your business credit card will probably be in a weird zone where your personal credit score is used to determine if you qualify. But make sure you use your EIN and company name for your company credit cards.
Your client, or the agency you work through, may require you to have business insurance. Usually, General Liability/Errors & Omissions (E&O)/Business Owner’s Policy (BOP) and (maybe) Worker’s Compensation.
Texas does not require you to have Worker’s Compensation Insurance if you are the LLC owner and you are the only employee of the LLC. However, some companies have that as a boilerplate requirement for vendors and making their HR/legal departments understand common sense is a futile effort. I end up just getting the WC insurance. It’s an annoying waste of money, but the cost is fairly low, and I don’t have the patience to explain things to people who refuse to think.
I get my business insurance through https://nextinsurance.com. It’s easy to start and stop policies as I start and stop projects.
One thing to be aware of is that when you stop a Worker’s Compensation policy, or end the year with it active, you’ll have to do a payroll audit, which may slightly increase or decrease the cost of the policy.
I used to do payroll through QuickBooks, until Intuit screwed things up. Now I use Gusto. The interface could use a bit of work, but it’s easy to pay myself and it lets me (as an employee) set up direct deposit to several different accounts. It also produces a W4 at the end of the year for my taxes.
I’m able to include reimbursements in my payroll checks in case I personally buy something for the company and need the company to reimburse me. This reimbursement is not taxed. It’s an expense for the company, so it decreases profit, and it’s not “income” for you personally.
If you need to drive to a client, you may be able to deduct the mileage for the drive, but probably not the drive returning home. This is something you might want to check with an accountant.
Speaking of reimbursements, if you have a separate room in your home that you use exclusively for work, your company can reimburse you for renting space (and electricity and internet), based on the percentage of the office’s square feet compared to your home’s square feet.
Basically, as an employee, you can contribute up to $22,500 per year, along with another $7,500 if you’re over 50. Of course, since that’s coming out of your salary, you need to have your company pay yourself at least as much as you personally contribute.
Your company can also contribute up to 25% of your personal income (W2 income and company profits). The formula is a little painful, since you have to discount half the FICA payment, so you might want an accountant’s help with this. There’s also an overall limit that you can’t contribute more than $66,000 per year (plus $7,500 for people over 50).
You can also have your spouse work for the company, and they can have a Solo 401(k).
For more details, check out here: https://www.nerdwallet.com/article/investing/what-is-a-solo-401k and https://www.irs.gov/retirement-plans/one-participant-401k-plans.
There are other retirement plans you can have through your company, such as traditional IRAs, Roth IRAs, and SEP-IRAs. Talk with an accountant to determine the best one for your situation.
One thing we need to watch out for nowadays is working remotely for a company headquartered in a state that charges state income taxes on remote employees. When working Corp-to-Corp, this problem is eliminated. Your company is a vendor and you’re an employee of your company, not the client company. So, your state income taxes would apply (assuming you don’t live in one of the states without an income tax – like Texas).
From what I’ve seen, companies won’t offer decent health insurance plans for solo entrepreneurs. The price benefits only come into play when you have additional employees, which defeats a lot of the other advantages of this type of setup. So, get on your spouse’s health insurance, if possible.
What To Watch Out For
Most of my work is done through agencies, since I don’t have a huge network or great sales ability. There are some things to watch out for.
First, some places will try to treat you like an employee when you’re working Corp-to-Corp.
I had one place where most contractors worked through them as W2 employees of the agency (with little benefits). So, the HR person wanted me to fill out an I9 form (proof that an employee has the right to work in the US). I explained to her that I was not an employee and that filling out employee forms may cause the IRS to say I’m an employee of their company, and not a vendor – which could potentially cause tax problems for them and me.
I had to get someone on the agency’s legal team to finally get her to realize I shouldn’t fill out that form.
You also need to know the billing and payment schedule. I worked through one agency where I billed once, at the end of the month, and they paid 50 days later. This was an agency that billed $300 million per year, and I was floating them money for months. I don’t answer their calls any longer.
Overall, there is a bit of extra work to setting up a company for contract programming. However, there can be massive tax benefits to doing so.
Let me know if anything wasn’t clear, isn’t covered, or if you have any other questions.